The Big 4 And Their Travel Card Relationships – Comfy And Cozy

This blog has recently been reminding you of the independence standards imposed on the audit firms with regard to their relationships with their vendors.

Don’t get me wrong… It’s not easy for anyone to keep it all straight.

In my previous post on PwC’s relationship with Aramark as a vendor for its cafeteria, in response to a commenter who took issue with my contention that PwC and not the owner of their Madison Avenue building, was the real vendor, I quoted:

“The independence issue is already there, if Aramark is PwC’s vendor. Section 602.02.b of the Codification of Financial Reporting (“the Codification”), states that materiality is not a consideration in the case of a direct financial interest.”

Further, “direct and material indirect business relationships, other than as a consumer in the normal course of business, with a client … will adversely affect the accountant’s independence with respect to that client. Such a mutuality or identity of interests with the client would cause the accountant to lose the appearance of objectivity and impartiality in the performance of his audit because the advancement of his interest would, to some extent, be dependent upon the client.”

PwC has to manage their involvement in this contract to make sure they are not getting any better deal from Aramark in exchange for lower fees to Goldman Sachs, for example.

The operative terminology for independence standards when the vendor is also an audit client is:

“a consumer in the normal course of business ”

...we have attempted to set forth in proposed rule 2-01(f)(11) a workable definition of “consumer in the ordinary course of business.” In general, an accountant acts as a “consumer in the ordinary course of business” when the accountant buys “routine” products or services on the same terms and conditions that are available to the seller’s other customers or clients.\153\

An accountant is not acting as a “consumer” if it resells the client’s products or services. Likewise, a purchase is not “in the ordinary course of business,” nor is the product “routine,” if it is significant to the firm or its employees. For example, an over-the-counter purchase of office supplies at customary prices would be considered in the ordinary course of business. Purchasing items other than on normal, customary terms, or acting as an agent,value-added reseller, or marketer of the client’s products, however, would not be acting as a consumer in the ordinary course of business.

Citigroup offloads Diners ClubCitigroup’s chief executive moved on Monday to streamline the troubled financial services conglomerate by selling the Diners Club International credit card network to Discover for $165m.

The decision to sever the 27-year tie with Diners comes as Vikram Pandit and his lieutenants conduct a review that could lead to up to 25,000 job losses across global operations, say people close to the situation.

So it’s a good time to take a look at the relationships between the Big 4 and the major travel and entertainment card companies. This business is big, as we all know auditors and consultants travel a lot! And EY, for example, has been in trouble before for not having the right controls in place to make sure there were no violations of independence rules, either in fact or appearance.

Travel Card Audit and Big 4 Business Relationships

Diners (Citigroup)

Auditor – KPMG

Customers – KPMG and Deloitte Audit

Diners (Discover)

Auditor – Deloitte

Customers – KPMG and Deloitte Audit

American Express

Auditor – PwC (It was EY until end of 2004 )

Customers – PwC and EY (and Deloitte Consulting)

With four big firms, and a few next tier firms, why do the Big 4 persist in having a travel and entertainment card relationship with a client?

Diners gets sold to a company that is also audited by its other Big 4 T&E card customer. When American Express had to dump EY due to the independence issues involved in giving EY rebates on their use of the card (a violation by American Express, but they don’t get sanctioned…) why select their other Big 4 T&E card customer as their new auditor?

Could it be that there is still some advantage to auditing the company that provides your card? Or using the card of your audit client?

When I left PwC, it was necessary to pay the balance on my American Express Card immediately, even though I would be waiting an extended period of time to get the reimbursement from PwC for any outstanding charges. As a matter of course and good policy, PwC makes sure that all charges are in and does a more thorough hands-on review of any final travel and expense reimbursement requests. They have your last paycheck and any severance payment (in most states but not in all locations) that can be offset, if any expense reimbursement request turns out to be outside of policy.

My American Express corporate card was canceled immediately and unable to be used as of my last day of employment, as it should be. However, PwC paid American Express directly about two months later when they completed their review for the final amounts I had submitted through the expense reimbursement system during my last week of employment.

So now I had a credit balance due to me on a card, the one with my name on it, that I was supposedly solely responsible for from a credit perspective. However, when I called American Express and asked for the credit to be remitted to me now that PwC had paid the charge, they indicated that I had to go through PwC to request that reimbursement, of the credit balance, on my American Express Card.

The one in my name.

PwC then conducted another two-month long process to check again that there were no outstanding expense reports, that they were satisfied I had fulfilled all my financial obligations, and that there was no further reason why I could not receive the check for the credit balance, on my American Express card, the one in my name, that I had to pay off when I left to preserve my credit rating.

So who had use of my $1,600 for those four months?

American Express.

I finally got the approval, FROM PWC.

I RECEIVED A CHECK, FROM AMERICAN EXPRESS ALMOST FOUR MONTHS AFTER LEAVING PWC.

Can anyone say that there is not more than a symbiotic relationship between the Big 4 and their T&E card vendors?

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I fail to see the conflict of interest in auditing the provider of your T&E card. I am sure all firms have a 30 or 60 day term on these cards, so they are never carrying large balances for extended periods of time, and the overall “sales” through the cards held by the Firm is in all likelihood a very small percentage of gross. So there is no “major supplier” relationship.

Also, in theory, I think that auditing your own T&E card provider would actually do a very minor amount to reduce overall audit load. Since the firms in theory are a paragon of internal control and review all purchases made by the cards, they should techinically be able to exclude their own purchases from the sample population for auditing pruposes, no?

I could see an issue if a firm was auditing a major realestate firm of which they were a leaseholder, but with cards, not so much…

My point was not there there is an inherent conflict. Auditing your card vendor is allowed by independence rules under the “consumer in the normal course” rules. My question is why, when there is a choice as there has been recently in both cases, the companies and firms don’t try to avoid this issue. Has anyone, including PCAOB and SEC, looked lately at whether the size of the business is “major supplier” size, whether the terms are still clean and comparable, and whether the way float and processing are handled might imply that the firms are acting “as an agent” of the card companies? That is not allowed. My intention is to encourage closer scrutiny of this situation by the regulators, given the size of the contracts and revenue passing through.

[…] that muddies the waters over whose side they are really on. They have cozy relationships with their travel services providers. They join their audit clients pre-retirement in senior positions. They are asked by the government […]

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Francine McKenna (@retheauditors) is the Transparency Reporter at MarketWatch.com, a Dow Jones publication, where her work is also featured frequently in the Wall Street Journal. McKenna had more than twenty-five years of experience in consulting and professional services including tenure at two Big 4 firms, both in the US and abroad before becoming a journalist. Look for her prior columns, "Accounting Watchdog" at Forbes.com and "Accountable" at American Banker. For more information, click "About" at the bottom of this page. For more information contact Francine McKenna, fmckenna@mckennapartners.com